October 2020 Letter

Advice; for My 45-year-old Self

A little over a year ago, we started a three-part series on financial planning advice to guide us as we age.  Events of the past six months altered our cadence, but we want to get back on track.  We titled part one, “Advice; for My 25-year-old Self,” and we ask for your indulgence on this journey.   Had you followed at least some of our advice “twenty years” ago, today you would be 45, with a fairly clean balance sheet, solid credit scores, and a healthy head start on your retirement savings.  However, you’d also have a whole new set of challenges including, but not limited to, a mortgage, college expenses, retirement savings, caring for an elder, and laying down the foundation for an estate plan.

Get Your House in Order

Midlife is a unique and challenging time, but you need to approach it the way you are instructed on an airplane; “put your oxygen mask on first.”  It’ll be much harder to assist others if your financial house isn’t in order.  Now is the time to seriously consider your own estate plan.  If you haven’t already done so, think about writing a will, consider establishing a revocable living trust, and review beneficiaries of your retirement plans.  Other important documents to establish or review include powers of attorney, medical and financial directives, and disability and long-term care insurance policies.  The cost of life insurance too is probably still very reasonable and getting a policy while you’re healthy is always ideal.  At this stage, go ahead and purchase more life insurance than you think you’ll need.  Finally, all of these documents should be reviewed periodically with appropriate family members and should be safely stored and readily accessible.

Around the house, if you haven’t refinanced your mortgage in a while, now would be a very good time to consider refinancing options with interest rates at historically low levels.  You may be able to lower your monthly payment and pay down the balance sooner.  Be careful with cash-out mortgages to help pay for college as there may be better alternatives.  Make sure you review and update your home insurance policies and check for coverage gaps to ensure you would be able to adequately replace your home and belongings.  An umbrella policy could also make sense to cover unknown liability exposure.

Retirement Update

By most measures, at 45, you’ve likely reached the halfway mark in your career.  You’re also likely on your way toward peak earnings and spending years as well.   Now is a great time to assess how your retirement savings are progressing and see how they stack up against your retirement timing and spending goals.  Using financial planning software, we can forecast the growth of your assets based on different asset return scenarios, while adjusting for inflation.  On the other side of the ledger, we can help you model expected expenditures and together get a sense of how long your current assets will last in retirement.  This establishes a baseline to help better plan your savings needs over the balance of your career and how realistic your retirement aspirations may be.

If it’s determined that you may be short of your goals, there are actions that should be taken to help bridge the gap.  Create a budget for everything, decide on “musts before wants,” and perhaps put an end to “youthful spending indiscretions.”  Also, check to make sure you’re making the most of your company’s retirement plan.  If your company offers a 401(k) plan, it’s likely that they have a matching program.  This is essentially found money and it’s important that you contribute up to at least the match offered.  This match won’t count toward your annual tax-exempt contribution limit, currently $19,500.  Also, at age 50, the so called “catch-up contribution” kicks in, allowing you to add an additional $6,500 to your 401(k) annually, for a total of $26,000, plus the company’s match.  If you’re not eligible for a company sponsored 401(k) plan or haven’t maxed out on contributions, annual IRA contributions may be the solution, but they are very limited.  The annual cap is $6,000 ($7,000 over age 50) and the tax deductibility may be reduced based on workplace offered plans and income limits.

Another useful consideration is consolidating your retirement accounts into a single IRA rollover account.  If you’ve worked for multiple employers in the past, you may still have an open 401(k) account that was left behind at one or more of those employers.  By rolling smaller accounts into one larger account, you may save on fees and may have more investment alternatives, as many 401(k) plans can legally only offer mutual funds and many 401(k) plan sponsors offer limited investment options.  Consolidation also simplifies recordkeeping and reduces the number of notifications you may need to make when you move or want to change beneficiaries.

Consolidating old 401(k)s may also present a good opportunity to consider establishing a Roth IRA.  Roth IRAs are funded with after-tax dollars and a conversion triggers a taxable event.  The Roth IRA’s main advantages include tax-free growth of the account’s assets, no additional taxes due on withdrawals, and no required minimum distributions (RMD), even after age 72.  Perhaps, though, the biggest determinant in deciding on a Roth conversion is whether or not your expected tax rate at retirement will be higher than your current tax rate.  It is also best to pay for all tax liabilities associated with a Roth conversion utilizing non-IRA funds.  Roth conversions can be tricky and there are many issues to consider.  We can help you navigate the process.

But don’t stop there.  Even if you’ve maxed your retirement plan contributions, you can still save and invest in a portfolio account.  History shows a well-balanced, growth-oriented investment portfolio of high-quality assets builds wealth over time.  At this point, there is no need to speculate on those “one-in-a-million” start-up ideas, but rather, focus on strong leading brands growing market share and generating free cash flow.  Don’t fear stock market exposure and train yourself to avoid panic selling.  Let your money work as hard as you.  Because you’re not as young as you used to be, rebalance your portfolio frequently, begin adding some bonds, make sure you’re diversified, and invest as much as you can.  A general rule of thumb is try to invest 15-20%, or more, of your salary.  Remember, at 45 years young, you should have a net worth equivalent to 5-8x your annual expenses.   

Sandwich Time

Now that we’ve checked on your financial health, what about everyone else?  By age 45, you may find yourself a part of the “sandwich generation.”  Your parents are probably moving through their retirement years and may need additional help with financial and medical issues.  At the same time, you may have children with higher education goals that need funding. 

The first step is to begin a conversation with your parents about their financial health and assessing their ability to manage assets and expenses.  Make sure they’ve set something aside for any unforeseen emergency costs too.  Crunching their numbers through financial planning software may make sense.  It’s also a good idea to check that all of their legal documents are current, including wills, powers of attorney, insurance contracts, and medical and financial directives.  Consider adding yourself or a sibling to your parents' checking account to facilitate bill paying in the event the parent becomes incapacitated.  Try to better understand their long-term wishes for charity and gifting.  Familiarize yourself with any trust documents and understand all of their provisions and who the successor trustees should be.  Finally, make sure Social Security and Medicare matters are in order.  The ultimate goal is to be on the same page as your parents and avoid any unnecessary, unpleasant surprises down the road.

On the other side of your personal sandwich are your kids.  A college education will likely be your biggest expense with a four-year public education nearing $100,000 and a private one topping $250,000 or more.  The primary education savings vehicle is perhaps the 529 college savings plan account you started years ago when the kids were young.  Remember, these accounts allow for tax-deferred growth and federal tax-free withdrawals for qualified educational expenses.  Another unique feature to 529s is portability.  If one child doesn’t use his or her account, it can be used for a sibling.  529s can affect financial aid though, so you’ll want to be mindful of that when it comes time to tap into the funds. 

If appropriate, it’s never too early to think about intergenerational gift strategies.  Perhaps passing some low basis assets to the kids or grandkids makes sense.  They’re probably at lower tax rates and could maybe benefit from the tax savings.  Speaking of kids, maybe they’re off to college soon as young adults.  Have a talk with them about signing healthcare waivers giving you access, as a parent, to medical records while they’re far away from home. 

Looking Ahead

The good news is that with careful planning, you still have plenty of time to make the most of your financial future and enjoy the wealth you’ve accumulated.  Consider new hobbies you’ve always been interested in, be open to new things and new ideas, learn and embrace technology, and have fun!  The challenges of being “stuck in the middle” can better inform you on things to do now to improve your situation going forward.  Setting a good example for your kids is always a good idea.

So, here’s a little homework to help you check things off your list: 

  • Pay off as many loans as possible
  • Max out retirement and investment contributions
  • Have an estate plan
  • Simplify your life
  • Manage your health and well-being

We can help navigate many of these issues, so just ask, and look for the next piece in this series, “Advice; for My 65-year-old Self” early next year.



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